Ground rent owners sue for compensation

Dozens of Maryland's largest holders ofground rents sued the state yesterday, seekingcompensation that could exceed $400 million,contending that ground rent reform laws effectivelyseized their property.

The 23-page lawsuit, filed in Anne ArundelCircuit Court, alleges that the laws makeground rent leases worthless by making it toocostly and cumbersome to collect rent or seizehouses if rents aren't paid. The laws effectivelyare an unconstitutional taking of propertyfor public use without just compensation, thesuit contends.

The new system "will prevent land ownersfrom receiving the rents owed on their leasesand make it impossible for them to sell theirproperties at anywhere near their prior fairmarket value, if at all," the lawsuit alleges.

"The governor and legislature made a decisionwith which we are not quibbling," EdwardJ. Meehan, an attorney with Skadden,Arps, Slate, Meagher & Flom LLP in Washingtonwho is representing the ground rent owners,said in an interview yesterday. "It waspublic policy to overturn 400 years of historyand to change the economics of the system.We accept that, and ask only for what the federaland state constitutions require, which isjust compensation.

"It's not fair that our clients should bear theburden of the changes to the system that the governor and legislature decidedto make," he said. "In essence,they've lost their property andthey only want just compensation."

This year, the General Assemblyoverhauled the state's system ofground rents, which has existedsince Colonial times, after an investigativeseries in The Sunshowed that a small group of investorshad used their power underthe law to seize hundreds ofhomes in Baltimore over unpaidrent as meager as $24. Several ofthose investors -- but not all --are among the plaintiffs.

Tens of thousands of homeownersin Baltimore City and Baltimoreand Anne Arundel countiesmust pay rent on the land undertheir houses unless they buy outtheir leases.

The reform bills signed by Gov.
Martin O'Malley abolished ejectment,the legal process thatground rent owners used to seizehouses; barred the creation ofnew ground rents; and requiredground rent owners to registertheir holdings with the state bySeptember 2010 or lose them.The exact number of groundrents is not known because therehas been no central registry. Thelawsuit cites estimates of 116,000to 212,000. Based on those numbers,the state owes ground rentowners and their entities $114million to more than $400 million,the lawsuit contends.

Montgomery County Democratand chairman of the Judicial ProceedingsCommittee, who helpedlead ground rent reform, said thelegislation makes clear thatground rent owners are entitledto a return on their investmentand that they can still take homesfor nonpayment of rent.

"They testified that they're notin this for the windfall," Froshsaid. "They never had the nerveto stand up in public and say,'This is a property right to whichwe're entitled. We're allowed togo take people's houses.' It lookslike they have summoned it up inthis complaint."

The lawsuit filed yesterday isthe second to challenge groundrent reform. In June, Charles J.Muskin, a trustee for his grandfather'sestate, which includesabout 300 ground rents, filed andthen withdrew a challenge to theregistry requirement in AnneArundel Circuit Court.

Muskin, a master in the CircuitCourt, said he had decided thatthe lawsuit was "premature" andthat he wanted to wait for the reformsto launch.

Ground rent owners had arguedduring the legislative session thathomeowners would refuse to paytheir rent without the threat oflosing their homes.

"Tenants will no longer haveany incentive to pay the rent theyare contractually obligated to pay,and property owners will have noadequate means of enforcingtheir vested contractual and propertyrights," the lawsuit alleges.Frosh said yesterday that hedoes not buy that argument."Unless we can take your house,you're not going to pay us $80?"Frosh said. "That's just unbelievable.Ask any credit card company."

Maryland Attorney GeneralDouglas F. Gansler "is very comfortablethat there are no soundlegal arguments against it andthat the bill will be upheld by thecourt," said spokeswoman SandyBrantley. "He will vigorously fightany challenge brought by thosewho may have unjustly benefited."

During the General Assemblysession, legislators said they triedto balance the interests of homeownerswith those of ground rentholders. All of the bills were examinedfor constitutionality bythe attorney general's office, andground rent owners had the opportunityto comment on the billsduring the hearings.

"These folks ought to get a grip,"said Sen. George W. Della Jr., aBaltimore Democrat who workedfor ground rent reform. "Theyneed to get real. They were takingadvantage of people, and nowthey're screaming?"

The law abolishing ejectmenttook effect July 1. As ground rentowners anticipated the change,they filed about 600 ejectmentlawsuits in the first half of 2007 inBaltimore Circuit Court -- morethan were filed in any full yearbefore 2005.

Rather than filing an ejectmentlawsuit to seize a property, leaseholdersnow have to file a lienagainst the home to recover theirdebt. Homeowners have 45 daysto challenge that action in courtand can recover any equity remainingafter the debts are repaidthrough a settlement or foreclosure.Under the old law, a ground rentowner could seize a housethrough an ejectment process,resell it and keep all the proceeds.

To settle lawsuits and keep theirhomes, homeowners routinelywere required to pay ground rentholders 20 to 50 times the amountof back rent owed.

Del. Maggie L. McIntosh, a BaltimoreDemocrat and chairwomanof the House committee thathelped to shepherd ground rentbills through the Assembly, saidnone of the new legislation didaway with existing ground rents.

"In fact, we accepted it as a legitimateinvestment option, and wesimply modernized the practiceof ground rents because, unfortunately,one or two bad eggs out ofthe whole hen house were causinga problem," she said.